Africa Telconomics

Looking Ahead to African Telecoms 2009: All About Cash

Download full Research Note: Download 010609RN 2009 Outlook

At the onset of 2009, we submit to tradition and examine a number of key questions African telecoms investors will face in the New Year. All major questions for 2009 are underpinned by one common thread: cash. The ability to raise, generate and preserve cash will be arguably the most important determinant of what survives, what struggles and what disappears. We see the key questions as follows:

1.       Can mobile networks withstand the surge in data traffic?

2.       Is the African wholesale business really this great – can all the capacity projects survive?

3.       Will African mobile remain a great fundamentals business?

4.       Can African mobile valuations survive the economic downturn?

5.       Will the market see more consolidation?

A summary of our 2009 outlook: mobile networks will struggle with data traffic but hold steady, African submarine cable projects surely can’t all survive; the fundamentals of mobile are still great but increasingly brutal at the edges; valuations are high and surely can’t keep this up, and we believe the best value-creating acquisitions will be horizontal.

US Liquidity Crunch and African TMT Markets – The Demise of the Decoupling Theory

With the current US liquidity crisis threatening to take global financial markets into a downwards tailspin, we conducted an informal –and unscientific- survey of a small number of Africa-focused fund managers and other others directly involved in African project finance to get their assessment of the impact of the crisis on the African TMT space. We asked three questions:

(1) How does the US liquidity crunch impact the availability of equity (or debt) capital for African transactions?

(2) What do you see as the impact of the current crisis on African TMT deal-flow over the next 6 months?

(3) Do you see the African TMT space as insulated from a potential global economic downturn?

 

It should be noted that we expect the US Congress to eventually pass a “rescue plan”. This should help alleviate some of the crunch, but the bank failures of the past few weeks will have some lingering effects. Below are some extracts of a client research note summarizing some of the views we gathered, mixed in with some of our own analysis.

• The fundamentals of the African TMT space remain strong: From a pure fundamentals standpoint, the African TMT market is perceived as largely impervious to a major global economic downturn. Demand for basic voice services remain strong – “inelastic”, some argue- , and most projects remain bankable.
• This, however, may be one of those instances where fundamentals matter little. With regards to the availability of debt financing, two-thirds of the respondents to our survey agreed that the US liquidity crisis would have a direct impact on African TMT markets. For one, all the world’s large commercial banks are in the process of cleansing their balance sheets of any loans than are either toxic or perceived as too exotic. There is the perennial “flight to quality” that typically accompanies market volatility and rarely, if ever favors African markets. African banks with credit lines in Western markets may see them tightened, if not frozen. A number of markets (e.g. Nigeria, Kenya) are already facing their own liquidity issues, though those appear only remotely linked to the US crunch.
• Bring back the DFIs: as lenders become more risk adverse, the cost of capital will rise. Banks will lend to service providers that are sure bets and hold back on everybody else. First tier players (e.g. Safaricom, MTN) will have no issues getting financing. WiMAX providers and other fixed or mobile third tier players will have to look for alternative options; the most notable outcome of the liquidity crunch may well be the resurgence of vendor financing and Development Finance Institutions (DFIs).    
• The market is set to see fewer highly-leveraged transactions. Nonetheless, equity investments originating in the Middle East should be affected only marginally.

 

Extracted from An AfricaNext Research Note:  The US Liquidity Crisis, African TMT markets and the Demise of the Decoupling Theory

Broadband: Africa’s Most Significant Opportunity for Returns since the Mobile Voice Boom

Download africa_broadband_extract.pdf

African broadband business models have long been so dispiritingly brutal that it is hardly surprising that few private service providers have ever created any meaningful value out of them. The similarities with the African mobile voice market of the mid-nineties are uncanny. The expensive services and devices and the cream-skimming business models. The frustrating, persistent and maddeningly self-defeating regulatory roadblocks.

This, in our view, is about to change. We have reviewed Internet and broadband dynamics in 33 African markets and our conclusion is inescapable. We believe broadband services and applications are 12 to 24 months removed from a tipping point, a commercial inflexion point that would lead to a drastic increase in adoption and revenue generation. In essence, we argue that broadband, in its various forms–and other than perhaps, pay-TV- is the most significant opportunity for investment returns in the African TMT sector since the mobile voice boom.

In our new report -3G, WiMAX, ADSL and the Future of African Broadband: Projections, Economics and Best Practices- we argue, among other points:

•  That the future of African broadband will be primarily HSPA and EVDO-based
•  That the death of wireline broadband has been overstated;
• That mobile players will dominate the African Internet space with the same acumen they brought to voice;
• That for all their upside, mobile data models carry worse margins that voice models
• And that contrary to oft-quoted conventional wisdom, the business case for African 3G is as solid as it’s ever been.

 

Download our 16-page Excerpt (including Executive Summary, Table of Contents and more..) - Download africa_broadband_extract.pdf

Starcomms: Nigeria's Other Mobile Opportunity

During the second quarter of 2008, Nigerian CDMA operator Starcomms became the first Nigerian mobile operator to be listed on the Nigerian Stock Exchange (NSE). The company’s listing came after a private placement exercise that raised in excess of NGN64.5bn (~$550m) from high net worth and institutional investors. The shares have since lost around 40% of their value (as of August 22, 2008), declining from around NGN13 to NGN8 as the company reported a loss for the first half of 2008.

Investor jitters notwithstanding, we believe the Starcomms business carries substantial long term upside and at current price levels, represents a relatively cheap entry point into the growing Nigerian mobile market. 

It is difficult to refrain from using superlatives when discussing Nigerian mobile market growth. Thanks to a mix of intense competition, sensible regulation, scantiness of alternatives and strong demand, Nigerian mobile subscriber market has grown by a compound average of about 70% over the past three years. This is Africa’s largest mobile market in subscriber terms, one that adds 10m-12m new subscriptions annually. 

Starcomms share of the Nigerian active line subscriber market was around 2.4% at the end of June 2008. Such a share would be too small anywhere else, but is relatively solid in a market that generates $6bn-$7bn in revenue each year. The company is the also largest of the non-GSM service providers, with a 34% share of that segment. Starcomms should benefit from persistent medium term growth. The company’s revenue line is already benefiting from this dynamic; first half 2008 revenue rose by more than 100% to NGN17.5bn (US$145m).

 

Beyond the above, we believe the underlying upside for Starcomms is in the company’s leadership position in the mobile Internet access provision segment. Other than mobile voice, broadband access, in our view, is the single most significant Nigerian telecoms opportunity of the next five years.

 

The full Investor Research Note is available upon request to all purchasers of AfricaNext Research reports.

Rwanda's Third License Opportunity: We Like it – at the Right Price

At the end of June, the Rwandan telecoms regulator, the Rwanda Utilities Regulatory Agency (RURA) invited bids for the country’s third unified telecommunications license. The third license follows the sale of an 80% stake in state-owned operator Rwandatel to Libya’s Lap Green Networks for $100m in November 2007. The market’s other player is MTN Rwanda, which controls around 95% of Rwanda’s mobile subscriber and revenue bases.

The Government of Rwanda (GoR) can hardly be blamed for putting another license in the market. In the Rwandatel transaction (and we suspect, much to the GoR’s happy surprise), the state-owned operation was valued $100m+ higher than in a previous transaction a mere five months earlier. This was largely because of the inclusion of a mobile license as part of the company’s assets. We like this opportunity - as long as the price is right:

• Despite an      already low marginal ARPU, the nearly $100m (2008F) Rwandan mobile market      will generate more incremental cumulative revenue over the next five years      than it has over the past five.
• The overall cost      environment is among the most attractive in Africa for a mobile operation.       
• The challenge      lies with competition. Market leader MTN is entrenched and profitable, Lap           Green/Rwandatel is somewhat unpredictable and      presumably cash rich.

Using a mix of comparable transaction and discounted cash flow analysis, we estimate fair value around $5m-$12m, with a maximum value of $15m-$20m including a “goodwill premium”. Anything above $20m, in our view, is silly money.

Is Globacom’s Sixth Mobile License Economically viable?

On June 20, Ghana’s National Communications Authority (NCA) announced it had awarded the country’s sixth mobile communications license to Nigerian operator Globacom Communications. Some investors may find it doubly puzzling, first that Ghana would auction a sixth mobile license in a market with a population of 22m, and second that some players would bid as much as USD50m for it. We do not.

From the standpoint of the NCA, we find the transaction highly justifiable. For Globacom, we believe the economics of the deal are questionable, at least on the surface, but there is a “bigger picture” factor that may make it worthwhile. Our analysis makes four main points:

• It has been suggested that it is somewhat excessive of Ghana’s telecoms regulator to award a sixth mobile license. We do not believe it is. 

• Ghana’s mobile market is unusually deep. Market shares have a top-heavy slant, there are few signs of growth softness and existing margins are high.

• In our view, the license fee is a relatively minor issue; the challenge in making the investment viable lies with the Capex requirements of the venture. For this reason, announced investment plans do strike us as mildly excessive.

• Globacom may be enigmatic, but its moves are always underpinned by ruthless business logic; this one is no exception.

Full analysis:Download arn_globacom_ghana.pdf